In his recent lecture (pdf) condemning the gold standard to students at George Washington University, Federal Reserve Chairman Ben Bernanke suggested that speculators had “attacked” central banks in the 1930s, forcing them to abandon the gold standard. Bernanke told the students:

Indeed, the Bank of England was famous for keeping, as Keynes called it, a thin film of gold. The British Central Bank only kept a small amount of gold, and they relied on credibility to stand by the gold standard under all circumstances to — so that nobody ever challenged them about that issue. But if for whatever reason, if markets lose confidence in your willingness and your commitment to maintaining that gold standard relationship, you can get a speculative attack. That is what happened in 1931 to the British. In 1931, for a lot of good reasons, speculators lost confidence that the British pound would stand gold, so just like a run on the bank, they brought all their pounds to the Bank of England and said, ‘Give me gold.” And it didn’t take long before the Bank of England was out of gold they didn’t have all the gold they needed to support the money supply and then, there was essentially — they’ve essentially had to leave the gold standard, so there was a lot of financial volatility created by this attack on the gold standard.

Unfortunately, Bernanke was not being completely forthright with the students about the nature of that so-called speculative attack on the gold standard. What was actually happening is that people were figuring out that the government couldn’t pay its debts, largely because it had attempted to effectively defraud the people through the over-issuance of debt instruments. The problem wasn’t that the central bank “didn’t have all the gold they needed to support the money supply,” as Bernanke indicated. The problem was that the government didn’t have the money (gold and silver coins) to pay its debts. What Bernanke calls a “speculative attack” was simply a demand by people that the government live up to the promises that it had made in its debt instruments.

By suggesting that speculators had “attacked” the central bank and forced it to abandon the gold standard, Bernanke is obviously implying that the gold standard was a system that was based on paper money that was somehow “backed” by gold, a common misconception that has long been taught in government schools across the land. The speculative “attacks,” Bernanke intimated to the students, left the central bank no choice but to leave the paper-money system in place but no longer “backed” by gold.

Nothing could be further from the truth. As I pointed out in a previous post entitled “Gold versus Paper,” the gold standard was not a system in which paper money was “backed” by gold. Instead, the gold standard was a system in which gold coins and silver coins were the official money of the country.

Within that system, both private companies and the government would borrow money. What they would be borrowing is people’s gold and silver coins, which was the official money of the country. To evidence the debt, the company or the government would issue promissory notes promising to pay the money back on a date certain in the future, plus interest.

Let’s take a simple example. You come to me and ask to borrow $10,000 in gold coins. I agree to the deal. I give you the coins, and you sign a promissory note promising to repay me $10,000 in gold coins one year from now, plus 2 percent interest. When the note comes due, I’m expecting you to pay me back my $10,000 in gold coins. When you do, I mark the note “paid” and give it back to you.

That’s the way private companies operated. They would borrow money from the public and issue notes or bonds (which were just longer term debts, such as ones payable 100 years from the execution of the note).

Notice something important here though: Under such a system, everyone understands that the notes and bonds are not money. They are instead promises to pay money. The money is the gold and silver coins. That was the official money of the country.

In principle, it was no different with respect to government borrowing. The government would borrow gold and silver coins from the public and deliver written notes and bonds to evidence the debt.

Again, however, everyone understands that the notes and bonds are simply evidence of indebtedness — evidencing a promise to repay a debt of gold and silver coins. The money being borrowed is the gold and silver coins. The notes and bonds are written evidence of the indebtedness.

In other words, the government’s notes and bonds are not “paper money backed by gold.” Instead, they are written promises to repay money that has been borrowed. The money borrowed and to be repaid is the gold and silver coins.

The government would also issue short term notes that were called bills. Bills were still promises to repay gold and silver coins. The only difference between bills and notes was the maturity dates. Bills, for example, could be payable on demand. Notes might not come due for, say, 5 years.

Over time, however, people found it convenient to use the government’s bills as money substitutes. For example, suppose I want to purchase some merchandise priced at $1,000. Let’s say that I’m holding $1,000 in government bills that are payable on demand. I could go to the central bank and demand payment of the debt represented by the bill. I would give the bank the bills and it would give me $1,000 in gold and silver coins. Then, I would take the gold and silver coins and give them to the seller of the merchandise.

However, there’s another option. Suppose I went to the seller and said, “I have these $1,000 in government bills that are payable on demand. Would you be willing to accept them in lieu of the gold and silver coins?” The seller, confident that he could take the bills to the government and get repaid for them in gold and silver coins, accepts the bills.

Notice, again, something important here though: The bills are not money. They are promises to pay money. By using them to buy the merchandise, they are a substitute for money but they are not money themselves.

How would the government get the money to repay its debts? One way was to maintain a stock of gold to pay back creditors as the bills, notes, and bonds became due. Another way was through the power of taxation.

What happened, however, was that like all public officials in history, British and U.S. officials liked to spend money. Rather then raise the money through taxation, which sometimes tends to make taxpayers angry, the officials decided to just print up and issue an ever-growing number of paper instruments of indebtedness to pay for their grandiose government projects, figuring that not everyone would show up to demand repayment at the same time.

It was essentially a scheme based on fraud. The government was over-issuing instruments of indebtedness to fund its projects, implicitly misrepresenting to people that it had the money or the wherewithal to repay its debts.

People finally figured out the fraud. They figured out that the government didn’t have the money or the wherewithal to pay its ever-increasing debts. Not wanting to get caught holding bad debt, people rushed in to demand payment of the debt instruments.

That’s what Bernanke and other monetary statists call a “speculative attack” on the central banks. They make it look like the “speculators” are bad people and that the central banks are innocent victims of such attacks. Actually, it was the government that had attacked people with its fraudulent misrepresentations. The people were simply trying to protect themselves from the government’s fraud by demanding that the government honor its loan commitments.

Soon after taking office, President Franklin Roosevelt decreed an end to the gold standard. That did not mean that a system based on paper money backed by gold was being abandoned, as Bernanke intimated to those students. It meant that gold and silver coins would no longer be the official money of the American people. And the reason was because the federal government could not honor its debts and also so that the government would be able to spend to its heart’s content in the future by using irredeemable paper instruments of debt that promised to pay nothing. Roosevelt’s decree held that the government’s paper instruments of indebtedness, promising to pay nothing, would now be the official money of the United States. That’s why a dollar bill states at the top “Federal Reserve Note.” Unlike under the gold standard, however, the Federal Reserve Note now promises to pay nothing.

Roosevelt nationalized gold at the same time as he imposed a paper-money system on the American people. He made it illegal for Americans to own gold even though that had been the official money of the country established by the Constitution and which had been the system for more than a century.

Why did FDR do that? After all, it’s obvious that he could have simply imposed the paper-money system and continued permitting Americans to own gold and silver coins, which is the situation we live under today.

My hunch is that the reason that FDR and his statist cronies made gold ownership a felony offense is so that they could, over 3 or 4 generations, smash out of the consciousness of the American people what the gold standard really was — the decision by the American people to use gold and silver coins as their official money. Within a few generations, people would have forgotten that important principle, enabling government officials to fill people’s minds with the same type of statist nonsense about the gold standard that Bernanke inserted into the minds of those GWU students.

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Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education.
He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at
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Jacob G. Hornberger

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation.